One of the most basic questions that economists try to answer is how many people are working. Each month the Department of Labor (DOL) and the Bureau of Labor Statistics (BLS) release a slew of data meant to represent the state of the US economy. The most familiar and often cited number is the unemployment rate, which takes a number of forms. Also important is the labor force participation rate, which is a measure of the total adult population that is employed. CJC maintains an extensive list of unemployment, poverty, and many other economic factors for the US and Illinois on the WIRE. This blog post attempts to demystify two of these numbers, the unemployment rate and labor force participation rate.
There are six different measures of unemployment. They vary from measuring only individuals unemployed for 15 weeks or longer (currently 2%), to measuring not only the unemployed, but also the underemployed. To keep up to date on unemployment rates and see a definition of each, see this page on the WIRE. The unemployment that you will see reported most often in newspapers and on the news is called the “U-3” rate; it’s considered the official rate by the BLS. The U-3 rate is a measure of the percent of the adult population who are actively looking for but are unable to find work. This rate stood at 4.9% nationally following the most recent survey, this is down from a high near 10% during the recession.
This graph, from a recent Wall Street Journal article, provides a comparison and definitions of the six different unemployment measures. All six measure rose significantly during the most recent recession, but have fallen steadily since.
The most inclusive figure is the “U-6” rate. This is a measure of those who are seeking but unable to find work, individuals employed part-time because they are unable to find full-time work, and people who want to work but have given up looking for employment. During the recession many people gave up actively seeking employment after months of job searching, they were therefore no longer counted in the official unemployment rate that is often referenced. The U-6 unemployment rate is always higher than the official rate; it stood at 9.9% nationally in January.
Labor Force Participation Rate
Some economists, politicians, and policymakers believe that the labor force participation rate, the total labor force (those who are employed or looking for work) divided by the total population over age 16, is a better measure of the state of the economy. Like the unemployment rate, the labor force participation rate is impacted by the state of the economy, but it is also impacted by noneconomic factors. The labor force participation increased for decades, primarily due to demographic trends and changing social norms and an increase in the proportion of women choosing to join the labor force.
The labor force participation rate increased steadily for 50 years as more women joined the labor force. The upward trend has now reversed as the baby boomer generation begins to retire.
The decreasing labor force participation rate isn’t necessarily a sign that the economy isn’t doing well, the number is representative of a complex set of factors. Demographic trends, such as the retiring baby boomer generation, will inevitably result in a lower participation rate, because there are a higher proportion of retirees to the overall workforce. More young adults today are pursuing higher education, which will also lead to a lower participation rate. Today’s economy requires workers to have more skills and education; a lower participation rate among young adults shouldn’t necessarily be interpreted as a bad sign. Numerous studies have also shown an increase in the number of homes with only one working adult. This may be representative of the increased cost of childcare, because for many families it’s no longer financially beneficial for both parents to work.
When looking at the unemployment and labor force participation rate it’s also important to consider the types of jobs that people are currently working, even if they are considered to be employed. Although the unemployment rate has decreased significantly since the height of the recession, many workers continue to suffer from stagnating wages, are stuck in part-time work, or are unable to find employment that allows them to fully utilize their skills. Much of the decrease in the labor force participation rate is a result of inevitable demographic trends, such as an older population entering retirement and the need for a more educated workforce. However, more research should be done on the impacts that high childcare costs are having on the participation rate so we can implement policies that ensure that high childcare costs aren’t forcing parents out of the labor market. As the economy improves and unemployment falls, some will use the opportunity to justify cuts to existing workforce programs, but the field continues to be vital in connecting low-income workers to better jobs, higher salaries, and greater economic opportunities.